Comments on Fed Watch: Monetary Policy to Become Easier Next Week?TypePad2012-12-05T02:25:53ZMark Thomahttp://economistsview.typepad.com/economistsview/tag:typepad.com,2003:http://economistsview.typepad.com/economistsview/2012/12/fed-watch-monetary-policy-to-become-easier-next-week/comments/atom.xml/Winslow R. commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017d3e862534970c2012-12-06T16:58:11Z2012-12-06T16:58:11ZWinslow R.I'd say the real focus should be on Fed Reserve Bank of New York President Dudley. He points out the...<p>I&#39;d say the real focus should be on Fed Reserve Bank of New York President Dudley.</p>
<p>He points out the spread between the interest rates on MBS purchases and what consumers pay has widened from .4% to 1.2 % </p>
<p>Banks (really GSE&#39;s Fannie and Freddie) are reaping the benefits of QE 3 not consumers.</p>
<p><a href="http://www.bloomberg.com/news/2012-12-03/fed-s-dudley-sees-impediment-in-mortgage-bond-rate-spreads.html" rel="nofollow">http://www.bloomberg.com/news/2012-12-03/fed-s-dudley-sees-impediment-in-mortgage-bond-rate-spreads.html</a></p>
<p>QE 4 won&#39;t have impact until consumers see the benefit.</p>
<p>Dudley is pointing out there is no competition in the lending market.</p>Edward Lambert commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017c3451c1b4970b2012-12-06T02:23:11Z2012-12-06T02:23:11ZEdward LambertThe revision for July 1, 2012 Labor share of income number came out today... The UT was revised for that...<p>The revision for July 1, 2012 Labor share of income number came out today...<br />
The UT was revised for that day too...<br />
UT is total unused capacity available for labor and capital</p>
<p>Old UT was 2.2% points<br />
Revised UT is 1.3% points...</p>
<p>We are closer to the zero lower bound of UT than I thought. That is why capacity utilizatin has backed down since then from 78.5 to 77.8.</p>
<p>The economy is hitting the wall and labor share is heading in the wrong direction. </p>John Cummings commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5f3ec17970d2012-12-05T22:45:07Z2012-12-05T22:45:07ZJohn CummingsSo how has the "fiscal cliff" impacted the economy? I see no impact. Sandy related mumble should not count.<p>So how has the &quot;fiscal cliff&quot; impacted the economy? I see no impact. Sandy related mumble should not count. </p>Edward Lambert commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5f3d399970d2012-12-05T22:30:09Z2012-12-05T22:30:09ZEdward LambertThe news came out today... (3rdQ, Q to Q) Real hourly wages = -1.4% productivity = +2.9% unit labor costs...<p>The news came out today... (3rdQ, Q to Q)<br />
Real hourly wages = -1.4%<br />
productivity = +2.9%<br />
unit labor costs = -1.9%</p>
<p>let&#39;s analyze this..<br />
labor income = real wages/productivity<br />
labor income = -1.4/2.9<br />
labor income = -0.48%</p>
<p>labor income = unit labor costs/price level<br />
Here, with unit labor costs down -1.9%, labor income is going down too...</p>
<p>I wish i could put this in big letters...<br />
Folks, this is not good news... according to the constraints of the UT equation, we are precipitously close to a recession. Capacity utilization is now stuck and unemployment will not decrease much at all. The UT could be within 1% point of the zero lower bound.<br />
A recession could be forming right under our feet at this very moment.<br />
The Fed and others are not doing a good job for the people of the US.</p>Mark A. Sadowski commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017d3e7e4ee2970c2012-12-05T20:26:47Z2012-12-05T20:26:47ZMark A. SadowskiHe doesn't need any. He just "thinks it through," sort of like the Austrians. Either that or we're reading the...<p>He doesn&#39;t need any. He just &quot;thinks it through,&quot; sort of like the Austrians.</p>
<p>Either that or we&#39;re reading the extemporaneous thoughts of his bellybutton talking to his Iputz.</p>Mark A. Sadowski commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5f2fecf970d2012-12-05T20:22:56Z2012-12-05T20:22:56ZMark A. Sadowski"i doubt monetary policy can create these outcomes even if the FED were in the hands of bolsheviks" You mean...<p>&quot;i doubt monetary policy can create these outcomes <br />
even if the FED were in the hands of bolsheviks&quot;</p>
<p>You mean like the ones running the House of Representatives? </p>Mark A. Sadowski commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5f2fc8a970d2012-12-05T20:21:29Z2012-12-05T20:21:29ZMark A. SadowskiI realize it is common to see one of the goals of unconventional monetary stimulus as the lowering of long...<p>I realize it is common to see one of the goals of unconventional monetary stimulus as the lowering of long term rates. But if monetary stimulus is truly successful the opposite will happen. </p>
<p>There are multiple theories about the term structure of interest rates: </p>
<p><a href="http://en.wikipedia.org/wiki/Yield_curve" rel="nofollow">http://en.wikipedia.org/wiki/Yield_curve</a></p>
<p>The Liquidity Premium and Preferred Habitat theories are the most widely accepted theories of term structure of interest rates because they explain the major empirical facts about the term structure so well. They also combine the features of both the Expectations Theory and the Segmented Markets Theory by asserting that a long term interest rate will be the sum of a liquidity premium and the average of the short term interest rates that are expected to occur over the life of the bond. </p>
<p>So, for a given liquidity premium, if long term interest rates change this means that the average of the sum of expected inflation and expected real interest rates have changed. In turn, short term real rates reflect monetary stance and are likely to be low when real GDP is growing too slowly and high when real GDP is growing too fast.</p>
<p>So theoretically long term rates should correlate well with the sum of expected inflation and the expected real GDP growth rate, which is of course the expected NGDP growth growth rate. Do they? </p>
<p>Naturally:</p>
<p><a href="http://3.bp.blogspot.com/-fQOh2jjNS_8/T2kdMyGHxAI/AAAAAAAACXI/y5k6QONVFGM/s1600/treasyield_NGDP.jpg" rel="nofollow">http://3.bp.blogspot.com/-fQOh2jjNS_8/T2kdMyGHxAI/AAAAAAAACXI/y5k6QONVFGM/s1600/treasyield_NGDP.jpg</a></p>
<p>In fact this has been corroborated by research:</p>
<p><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=270936" rel="nofollow">http://papers.ssrn.com/sol3/papers.cfm?abstract_id=270936</a></p>Mark A. Sadowski commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017c344f4f42970b2012-12-05T20:08:55Z2012-12-05T20:08:55ZMark A. SadowskiMonetary policy is not credit policy.<p>Monetary policy is not credit policy. </p>Mark A. Sadowski commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5f2e58c970d2012-12-05T20:06:43Z2012-12-05T20:06:43ZMark A. SadowskiCorrection on that correction: labor share of output = unit labor costs / price level [Come to think of it,...<p>Correction on that correction:</p>
<p>labor share of output = unit labor costs / price level</p>
<p>[Come to think of it, the original correction wasn&#39;t necessary and only made things worse.]</p>Mark A. Sadowski commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5f2ce69970d2012-12-05T19:52:50Z2012-12-05T19:52:50ZMark A. Sadowski"labor income = unit labor cost/price level" Correction: labor share of income = unit labor costs x price level<p>&quot;labor income = unit labor cost/price level&quot;</p>
<p>Correction:</p>
<p>labor share of income = unit labor costs x price level</p>Mark A. Sadowski commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017d3e7e0c3d970c2012-12-05T19:46:33Z2012-12-05T19:46:33ZMark A. SadowskiA comment on Bullard's Six Threshold Challenges: "1.The Fed needs to make clear that in the long-run the Fed cannot...<p>A comment on Bullard&#39;s Six Threshold Challenges:</p>
<p>&quot;1.The Fed needs to make clear that in the long-run the Fed cannot target unemployment.&quot;</p>
<p>In the long run the Fed can only hit nominal, not real targets such as inflation. The problem with Inflation Rate Targeting (IT) is it is destabilizing in the face of aggregate supply (AS) shocks. Moreover, as it is a *rate* target, rather than a *level* target, it fails to correct for previous failures to make the target. That&#39;s why we need a nominal GDP level target (NGDPLT).</p>
<p>&quot;2.He believes the threshold should be on actual outcomes, not forecasts.&quot;</p>
<p>Policy in the present should *only* be conducted based on forecasts. Conducting monetary policy based on outcomes would be like trying to drive a car by looking in the rearview mirror.<br />
<br />
&quot;3.The Fed needs to communicate that policy is about more than just two variables. For example, he suggests the possibility of raising interest rates to limit asset price bubbles.&quot;</p>
<p>The Fed needs to communicate that policy is about only *one* variable: nominal GDP. Recognizing the limitations of monetary policy means that it can do the one thing that it is truly able to do that much more more effectively. It also means that the responsibility for other macroeconomic goals will be more clearly recognized as lying entirely elsewhere.</p>
<p>&quot;4.Unemployment is not the only measure of the labor market. The Fed takes a broader view of labor markets into consideration.&quot;</p>
<p>Bullard adores Smet-Wouters type Dynamic Stochastic Generalized Equilibrium (DSGE) models which measure labor market tightness by the difference between the rate of change in the marginal product of labor (MPL), and the rate of change in labor compensation. Somehow it has escaped his attention that this variable has been signalling a very lax labor market for the last four years.</p>
<p>&quot;5.Unemployment can remain high, such as in Europe (I think this is really just a restatement of point one).&quot;</p>
<p>Theoretically this is true, but Bullard provides absolutely no evidence for why the US labor markets suddenly became more eurozone-like in the last four years. And based on the relative lack of employment growth dispersion, the relatively low jobs opening rate, and sagging unit labor costs, everything is pointing in the opposite direction. </p>
<p>&quot;6.Beware that thresholds will be viewed as triggers, which they are not.&quot;</p>
<p>Bullard is all against discretion when it comes to inflation, but he&#39;s all for it when it comes to unemployment.</p>Peter K. commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017d3e7dd370970c2012-12-05T19:13:33Z2012-12-05T19:13:33ZPeter K.http://www.negativeoutlook.blogspot.com"Putting all of this together, it is not clear that it would be beneficial for central banks to express tolerance...<p>&quot;Putting all of this together, it is not clear that it would be beneficial for central banks to express tolerance for faster inflation unless they can generate price increases of the proper speed and magnitude. Otherwise they might end up undermining their efforts by raising the real cost of capital. While by no means certain, this seems like enough of a possibility that central bankers should be very cautious about playing too much with the &quot;expectations channel&quot;. The point is not that faster inflation itself is necessarily bad. After all, if people take home more money they will be able to repay their debts and fulfill their nominal savings objectives, which ought to cause a rebound in economic activity (and in prices). But there are multiple routes to achieve this desired end result. Something more direct would probably be more effective and less risky.&quot;</p>
<p>Nobody except the hardcore Republican rightwing believes that something more direct wouldn&#39;t work better. This writer is insulting our intelligence pretty flagrantly. As he no doubt knows, the problem is that Republicans can filibuster fiscal stimulus and conservatives have successfully changed the conversation. Maybe if as in Peter Pan we clap our hands and wish really hard we&#39;ll get more fiscal stimulus. Maybe if Bernanke asks for more help for the 10th time that will do the trick. He did warn of the &quot;fiscal cliff.&quot; </p>
<p>The shear political stupidity of calling for more fiscal stimulus during a time of the austerity bomb/fiscal slope is impressive. Wow talk about solipsism and hobby horse riding to the extreme.</p>
<p>Basically this Economist snake oil salesman is just pitching his idea in the marketplace of ideas. He just wants to slag Krugman/Woodford etc. for whatever reasons, probably not very good ones.<br />
</p>Peter K. commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017d3e7db955970c2012-12-05T19:00:12Z2012-12-05T19:00:12ZPeter K.http://www.negativeoutlook.blogspot.comWhere's your evidence or proof?<p>Where&#39;s your evidence or proof?</p>Peter K. commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017d3e7db80e970c2012-12-05T18:59:30Z2012-12-05T18:59:30ZPeter K.http://www.negativeoutlook.blogspot.comdisagree, not to say that fiscal activism wouldn't be better. Fiscal and monetary activism are complementary. How much fiscal activism...<p>disagree, not to say that fiscal activism wouldn&#39;t be better. Fiscal and monetary activism are complementary. </p>
<p>How much fiscal activism have we had since 2008? Obama&#39;s stimulus was pretty much canceled out by state and local austerity. </p>anne commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017d3e7d855d970c2012-12-05T18:29:06Z2012-12-05T18:29:06ZanneI doubt monetary policy can create these outcomes even if the FED were in the hands of Bolsheviks [ Keynes...<p>I doubt monetary policy can create these outcomes<br />
even if the FED were in the hands of Bolsheviks </p>
<p>[ Keynes was right, the conservative theorists of the 1970s who decided otherwise in inventing a labor cost driven inflation and decided monetary policy could supplant Keynesian ideas were wrong. ]</p>anne commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5f237f5970d2012-12-05T18:26:32Z2012-12-05T18:26:32ZanneI doubt monetary policy can create these outcomes even if the FED were in the hands of Bolsheviks [ Wonderful,...<p>I doubt monetary policy can create these outcomes<br />
even if the FED were in the hands of Bolsheviks </p>
<p>[ Wonderful, just wonderful. I agree however and have come to think Paul Krugman has been and is wrong about all a central bank having to do to end the sort of malaise that Japan has experienced or that we are experiencing is to act crazy. ]</p>paine commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017c344e4c91970b2012-12-05T17:40:46Z2012-12-05T17:40:46Zpainehttp://earthmart.blogspot.com/no and yet i doubt monetary policy can create these outcomes even if the FED were in the hands of...<p>no</p>
<p> and yet<br />
i doubt monetary policy can create these outcomes <br />
even if the FED were in the hands of bolsheviks </p>ReturnFreeRisk commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5f1ddc3970d2012-12-05T17:36:06Z2012-12-05T17:36:06ZReturnFreeRiskMeanwhile these guys over at The Economist are questioning the Fed policy: http://www.economist.com/blogs/freeexchange/2012/12/inflation How dare they?<p>Meanwhile these guys over at The Economist are questioning the Fed policy:<br />
<a href="http://www.economist.com/blogs/freeexchange/2012/12/inflation" rel="nofollow">http://www.economist.com/blogs/freeexchange/2012/12/inflation</a></p>
<p>How dare they?</p>Larry commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5f1d5f7970d2012-12-05T17:31:40Z2012-12-05T17:31:40ZLarryI just hope it doesn't darken yours.<p>I just hope it doesn&#39;t darken yours.</p>paine commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5f00363970d2012-12-05T13:14:39Z2012-12-05T13:14:39Zpainehttp://earthmart.blogspot.com/wage booming point to emphasize only fiscal activism can whip up any signifigant efective demand increases if wages accelerate it...<p>wage booming </p>
<p>point to emphasize</p>
<p>only fiscal activism can whip up any signifigant efective demand increases </p>
<p>if wages accelerate it will require <br />
seriously tightened job markets </p>
<p>only additional demand for out puts <br />
outputs that require additional labor<br />
only that will induce job market tightening </p>
<p></p>
<p>loose credit under present conditions<br />
--conditions of perceived high default risk-- <br />
is largely impossible <br />
if provided by a profit driven credit system <br />
like ours</p>paine commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5eff7ac970d2012-12-05T13:07:55Z2012-12-05T13:07:55Zpainehttp://earthmart.blogspot.com/"If we do go over the fiscal cliff, and stay over for a while" monetary policy can't counter effectively the...<p>&quot;If we do go over the fiscal cliff, and stay over for a while&quot;</p>
<p></p>
<p>monetary policy can&#39;t counter effectively </p>
<p>the fed &quot;really ramping up stimulus &quot; <br />
is a comic phrase </p>
<p>the fe is out of &quot;stim &quot; more or less </p>paine commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5eff2bb970d2012-12-05T13:04:52Z2012-12-05T13:04:52Zpainehttp://earthmart.blogspot.com/the other tools macro policy induced accelerated wage inflation a forex dive financial repression icome and wealth tax restructuring targeting...<p>the other tools</p>
<p><br />
macro policy induced accelerated wage inflation</p>
<p><br />
a forex dive </p>
<p>financial repression</p>
<p><br />
icome and wealth tax restructuring<br />
targeting maximal/optimal aggregate household MPC </p>paine commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017d3e7b3739970c2012-12-05T13:00:20Z2012-12-05T13:00:20Zpainehttp://earthmart.blogspot.com/your extra ordinary moves look tame and limp to me if unconstrained corporates refinance so what they aren't spending their...<p>your extra ordinary moves look tame and limp to me </p>
<p>if unconstrained corporates refinance so what</p>
<p>they aren&#39;t spending their full operating profits already</p>
<p>providing more monopoly credit<br />
for aquistions and mergers <br />
for stock buy ins <br />
<br />
all utterly non job market needle movers </p>
<p>simple thesis to refute:</p>
<p>&quot;under present corporate capitalism<br />
every job market stagnation <br />
every snail rate recovery <br />
is an effective demand problem<br />
in the end </p>
<p>even with gaping trade deficits <br />
huge debt accumulations <br />
even with unchecked mass immigration<br />
adequate injections sustaine long enough<br />
by the fiscal authority can produce full employment now<br />
and undergird a restructuring <br />
that resolves the deficit problems <br />
in spontaneous job demand<br />
trade imbalance<br />
and even fiscal budget imbalance &quot;</p>paine commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017c344c43ed970b2012-12-05T12:51:09Z2012-12-05T12:51:09Zpainehttp://earthmart.blogspot.com/larry has his cure all must brighten his day<p>larry has his cure all <br />
must brighten his day </p>paine commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5efd720970d2012-12-05T12:49:19Z2012-12-05T12:49:19Zpainehttp://earthmart.blogspot.com/all this is peanut gallery stuff quant easrers lkie our markski will in the after math simply say it wasn't...<p>all this is peanut gallery stuff <br />
quant easrers lkie our markski</p>
<p>will in the after math simply say<br />
it wasn&#39;t big enough <br />
much as we fiscal interventions chide <br />
the larry sommers stimu-less </p>
<p><br />
side show moment:<br />
i love bull-twit&#39;s <br />
unemployment caveats <br />
in particular</p>
<p>on an over un-employment target <br />
as if optimal inflation targets don&#39;t move too </p>
<p>nope bull-twit just wants as high a UE as is consistent with an expansion that retains sufficient &quot;air speed &quot;</p>
<p>operation &quot;creepy recovery&quot; proceeds on schedule </p>
<p><br />
mousely macro&#39;s suggestion CB&#39;s target a certain rate of change in nominal wages <br />
now that is more then diddling at the margins </p>
<p>errrr once monetary policy conclusively demonstrates <br />
its regained &quot; classic means &quot; policy traction</p>
<p>yes i still see quant ease<br />
as nothing but a flock of sterile cuckoos<br />
</p>Edward Lambert commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017c344afa86970b2012-12-05T09:09:54Z2012-12-05T09:09:54ZEdward LambertI'll just tie this all back to unit labor costs... labor income = unit labor cost/price level http://www.interfluidity.com/v2/2942.html "An increase...<p>I&#39;ll just tie this all back to unit labor costs...</p>
<p>labor income = unit labor cost/price level</p>
<p><a href="http://www.interfluidity.com/v2/2942.html" rel="nofollow">http://www.interfluidity.com/v2/2942.html</a></p>
<p>&quot;An increase in unit labor costs can mean one of two things. It can reflect an increase in the price level — inflation — or it can reflect an increase in labor’s share of output.&quot;<br />
&quot;...throughout the Great Moderation, increases in unit labor costs were the standard alarm bell cited by Fed policy makers as an event that would call for more restrictive policy.&quot;</p>
<p>Inflation can&#39;t go much lower to raise labor income share. Unit labor costs are suppressed by the Fed and businesses. So labor income looks to be staying low for a while. The Fed doesn&#39;t realize that the only way now to put available capacity of labor and capital in the economy is by raising labor share of income. The other two options are not good... lower capacity utilization or raise unemployment.</p>
<p>It is checkmate... The Fed has to allow unit labor costs to rise in order to give breathing room for economic improvements. (full stop)</p>Larry commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017c344af13d970b2012-12-05T09:02:35Z2012-12-05T09:02:39ZLarryhttp://profile.typepad.com/lfstevens" The Fed needs to make clear that in the long-run the Fed cannot target unemployment. He believes the threshold...<p>&quot;<br />
The Fed needs to make clear that in the long-run the Fed cannot target unemployment.<br />
He believes the threshold should be on actual outcomes, not forecasts.<br />
The Fed needs to communicate that policy is about more than just two variables. For example, he suggests the possibility of raising interest rates to limit asset price bubbles.<br />
Unemployment is not the only measure of the labor market. The Fed takes a broader view of labor markets into consideration.<br />
Unemployment can remain high, such as in Europe (I think this is really just a restatement of point one).<br />
Beware that thresholds will be viewed as triggers, which they are not.&quot;</p>
<p>All that junk, or....NGDPLT. Twist my arm.</p>Edward Lambert commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017c344a9064970b2012-12-05T08:04:03Z2012-12-05T08:04:03ZEdward LambertJust to show the equation for how capacity utilization absorbs underemployment... cu = g*N/CG g = quantity of capital goods...<p>Just to show the equation for how capacity utilization absorbs underemployment...</p>
<p>cu = g*N/CG<br />
g = quantity of capital goods utilized per labor hour<br />
N = number of labor hours employed<br />
CG = Total capital goods owned</p>
<p>As labor hours (N) rise, so does capacity utilization.<br />
As labor hours (N) fall (under-employment), capacity utilization falls too.</p>
<p>The Ut equation could develop like this...<br />
UT = u - (g*N)/CG + ((W/N)/(Y/N)) + calibration</p>
<p>UT = total unused capacity for labor and capital, non-negative.<br />
u = unemployment<br />
g = quantity of capital goods utilized per labor hour<br />
N = number of labor hours employed<br />
CG = Total capital goods &quot;economically&quot; possible<br />
W = Total real wages<br />
Y = Real national income<br />
W/N = real hourly wage<br />
Y/N = productivity<br />
Calibration sets zero lower bound of UT.</p>
<p>As you can see, hours employed (N) is important in this equation. Under-employment is factored in the UT equation.</p>Richard H. Serlin commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017d3e795c51970c2012-12-05T07:41:59Z2012-12-05T07:41:59ZRichard H. Serlinhttp://richardhserlin.blogspot.com/Big Question Tim -- and Mark: If we do go over the fiscal cliff, and stay over for a while:...<p>Big Question Tim -- and Mark:</p>
<p>If we do go over the fiscal cliff, and stay over for a while: </p>
<p>1) Will the Fed attempt to compensate by really ramping up stimulus.</p>
<p>2) Can the Fed compensate -- and I don&#39;t mean just by the conventional kinds of moves we&#39;ve seen, but also theoretically by doing something like putting a 1.5% ceiling on 30 year T-bonds and buying anything that moves above that ceiling, and a 3% ceiling on all prime private long term bonds.</p>Edward Lambert commented on 'Fed Watch: Monetary Policy to Become Easier Next Week?'tag:typepad.com,2003:6a00d83451b33869e2017ee5edf58c970d2012-12-05T07:12:21Z2012-12-05T07:12:21ZEdward Lambert"4. Unemployment is not the only measure of the labor market. The Fed takes a broader view of labor markets...<p>&quot;4. Unemployment is not the only measure of the labor market. The Fed takes a broader view of labor markets into consideration.&quot;</p>
<p>They also look at unit labor cost. They want to make sure ULC doesn&#39;t rise so much as to create inflation expectations among neo-liberals. This will keep a lid on labor income rising, which has already headed in the wrong direction.</p>
<p>Cawley asked a good question... how does under-employment affect the UT equation, total unused available capacity of labor and capital.<br />
The answer... the unemployment rate measures who is not being utilized at all. The capacity utilization rate reflects the work of those who are being utilized. So when the unemployment rate stays steady, capacity utilization can go up or down depending on the intensity of work by the employed. Thus under-employment is absorbed in the capacity utilization rate. </p>